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Polycom seeking partnerships, Wall Street looking for deals

October 19, 2009 | Chris Payatagool

Cisco_Tandberg.jpgBy Roger Cheng

Partnerships needed to cope in wake of Cisco-Tandberg merger.

After Cisco Systems Inc. unveiled its deal to buy Tandberg ASA earlier this month, Robert Hagerty, chief of video conferencing rival Polycom Inc., got on the horn with technology's largest players.

His aim: To strengthen the company's partnerships with industry giants to better weather the anticipated competitive storm expected to hit once Cisco and Tandberg merge their video conferencing businesses.

"Partnerships have definitely become a higher priority," he told Dow Jones Newswires."There's an urgency to the discussions."

bob_hagerty_polycom.jpgClick here to find out more! That's because Polycom - the last remaining publicly traded pure-play video conferencing company, with a roughly a third of the market - faces increased competition not only from the combined Cisco and Tandberg but also from privately held LifeSize Communications Inc.

Because of Polycom's position, the company is seen as takeover target, with Hewlett-Packard Co. as the most likely acquirer. However, the company's recent runup - the stock has doubled in 2009 - and rising competition make its stock look pricey at $26.48.

"I'm not looking to recommend the stock based on a possible takeover," said Samuel Wilson, analyst at JMP Securities."There are too many variables."

Polycom boasts a competitive product portfolio. While Cisco is paying the creators of "24" to place its phones and high-end video conferencing system on the show, the show also uses Polycom conferencing equipment, without the company having to pay for it.

Hagerty doesn't mince words when describing both Cisco and Tandberg's video conferencing products.

"I think both of them are bad," he said.

Cisco's initial $3 billion offer valued Tandberg at roughly 3.5 times its expected sales for the year. At that multiple, a deal for Polycom would be worth $3.3 billion. The company has a market capitalization of $2.31 billion.

Hagerty declined to comment on any potential takeover deals.

H-P is the acquirer that makes the most sense. Over the past few months, the technology company and Cisco have shifted from partners to rivals in the data center business. Cisco's move could prompt H-P to follow suit with an acquisition of its own.

H-P offers its own high-end telepresence product, known as Halo, which could be paired with Polycom's broader video conferencing product portfolio. H-P currently has a partnership with Tandberg.

A spokeswoman for H-P declined to comment on the speculation.

There remains risk to assuming a deal gets done. LifeSize presents Polycom's biggest threat - both as a competitor and alternative takeover target. The company is much smaller, but has been rapidly growing. Colin Buechler, who runs marketing and product management for LifeSize, said the company is taking share from its larger rivals.

"We consistently do well against Polycom," he said."We're the only one that's been growing throughout this market."

Buechler declined to comment on the takeover speculation.

Polycom, meanwhile, has been hit by the recession and slow recovery. The company's 2009 sales are expected to fall 12% from a year ago. While the video products continue to do well, its legacy phone conferencing gear hasn't been so fortunate. It's the primary cause of its continued declining sales.

The company, however, points to growth in the video network infrastructure business, which Hagerty said "has seen a big comeback." Wall Street is looking for solid results when Polycom reports third-quarter results Tuesday, although much of those expectations are priced in. Those numbers could also turn once Cisco's sales force starts pushing Tandberg's products through its broad distribution channels, analysts say.

"They've got six to 12 months before it becomes a brutally tough market for those guys," Wilson said.

[via total telecom]


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